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Sri Lanka’s foreign debt less attractive than even Greece's

So much for Colombo's claim of 'post-war optimism' amongst foreign investors.

Sri Lanka’s long term sovereign debt is presently rated as less attractive to foreign creditors than that of Greece, which triggered another international financial crisis earlier this year after being caught concealing a yawning budget deficit.

Standard & Poor’s, the debt rating agency, has given Greece’s foreign debt an overall rating of BB while Sri Lanka scores B+.

According to the agency’s website, a rating of B is understood as more vulnerable to debt default than BB. The +/-  signs indicate a state's relative standing within the overall ‘B’ category.

S&P's raised Sri Lanka’s debt rating in September this year from B to B+ primarily on the condition Colombo sticks to the IMF’s reform programme, the LBO reported.

Meanwhile, Sri Lanka is amongst the world's heaviest borrowers.

"An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation," Standard & Poor’s explains.

Although the category BB also indicated vulnerability to ‘adverse business, financial or economic conditions’ this only affected the sovereign’s ‘capacity’ to meet repayments. In contrast Sri Lanka’s B rating indicated that the government’s ‘capacity or willingness’ to meet repayments would be affected by adverse conditions.

As with Sri Lanka in June 2009, Greece had to turn to the IMF and the EU for a bailout in April this year because it could no longer raise credit on the international markets to cover the shortfall between its expenditure and its revenue.

However, Greece has been able to more rapidly recover its debt worthiness by implementing stringent IMF and EU backed reforms. Meanwhile Sri Lanka’s recent budget failed to excite investor confidence.

In an editorial that closely followed Sri Lanka’s budget announcement, the Wall Street Journal warned that despite the rhetoric of reform, investors would not be impressed until there was real change.

"Yet the real test will be in the implementation, and given its recent track record Colombo should expect investors to sit on the sidelines until the government shows it's serious about reform" the paper said.

While Albania, Angloa and Belarus share Sri Lanka's B+ rating, Argentina and Kenya are rated lower at B, with Ecuador and Fiji amongst the sovereigns rated at B-.

The question is whether Sri Lanka will continue with the economic reforms on which the debt rating is conditional.

“The stable rating outlook reflects our expectation of swift progress in addressing structural fiscal weaknesses mostly on the revenue side and the strong growth prospects,” LBO quoted S&P’s analyst Agost Benard as stating.

The agency warned, however, that the rating may be lowered in the event of substantial deviation from the IMF programme, or if expectations on recovery in Sri Lanka's growth prospects and revenue improvements disappoint, the LBO reported.